MAIN TAKEWAY – Lower top line due to a 13% y/y fall in volume and a 13% y/y fall in ASP. Pha Lai 1’s PPA expired and volumes fell short while it was paid only the lower CGM price. Then the bottom loss was exacerbated by (1) the low price (2) a narrower GPM (3) surging FX loss as the average JPY/VND rate soared by 16%. HSC has revised down FY2016 and now looks for NPAT to drop 43% y/y. Although we also feel that PPC will turn around strongly in 2-H FY2016 thanks to a new favourable PPA contract for Pha Lai 1.

ACTION – Reiterate Hold. Price has moved little this year. Valuations look a bit expensive given the FX loss. However short term catalysts include the expected 2-H turnaround. Although the JPY exposure makes predicting PPC’s share price direction a bit of a lottery always.

Sales were down 24% y/y and the bottom line turned red – Pha Lai Thermal Power JSC recently released rather poor unaudited FS numbers and recorded 1-H sales of VND3,223 billion (-24%) and an NPAT loss of VND350 billion (vs. a net profit of VND386 billion in 1-H FY2015). For FY2016, PPC targeted sales of VND7,039 billion (-4% y/y) and VND624 billions of EBT(+3% y/y). Hence, PPC just fulfilled 46% sales target while clearly with 1-H profit negative it will be very hard for PPC to reach anywhere close to their EBT target.

Top line was driven by a 13% y/y fall in volume mostly from Pha Lai 1 – Although the El Nino effect reached its peak during the 1-H FY2016, sale volume decreased 13%y/y to 2,730 million kWh. Still means that PPC was able to complete 51% of its full year volume target. More specifically, Pha Lai 1 (PL1) volumes plunged by 32% y/y to 825 million kWh while Pha Lai 2 (PL2) volume dropped by just 1% to 1,905 million kWh. This enabled PL1 to complete 38% of its full year volume target of 2,164 million kWh (+0.3% y/y) and for PL2 to completed 60% its full year volume target of 3,151 million kWh (-11% y/y).

During the 1-H there was no PPA in place for PL1 so the output was sold at the CGM price. More on that below. However, despite the CGM price being below the previous PPA price it was still higher than the PPA offered by EVN to other hydropower plants. And in the 1-H hy-dropower volumes from other plants in the North were strong so EVN had the luxury of being fairly choosy. Hence with no guaranteed volumes, PL1 was allocated very low volumes by EVN under the “Qc” system (Qc is the contracted volume allocated by EVN to each power plant on a monthly basis) who is of course always anxious to reduce their input electricity cost.

We are more optimistic on the 2-H volumes and ASP given that;

PPC has now negotiated a PPA for PL1 which may encourage more PL1 throughput in the 2-H. As the new PPA contract with PL 1 has guaranteed certain volume in it in order for EVN to ensure the security of generation sources. In 2-H FY2016, PL1 volumes are expected to be 990 million kWh, 20% higher than in 1-H FY2016 as the guaranteed certain volume is 595 million kWh according to the new PPA contract. Any balance would then will be sold on the CGM.

However while we see better volumes in the 2-H although it will still be hard for PL1 to reach the original full year volume target. Meanwhile PL2 is ahead of seasonal targets and is likely to overshoot in the full year.

And a 13% y/y fall in ASP as Pha Lai 1 reduced ASP – The combined ASP (for total volume sold both under PPA and in the Competitive Generation Market – CGM) for 1-H FY2016 was around VND1,172/kWh, down 13% y/y. All power generation volume of Pha Lai 1 was sold at lower CGM price in 1-H FY2016. This came about as PL1 was fully depreciated in FY2015 and hence the old PPA contract also expired.

Then in 1-H FY2016, with the new PPA contract price not yet negotiated, as mentioned above EVN allocated PL1 low “Qc” volumes and then offered to pay PPC the CGM price for this. Now assuming as we do that CGM volume accounted for 15% of total 1-H sale volume, we estimate that the 1-H FY2016 CGM price was VND1,090 per KwH or 17% lower than the FY2015 CGM price and also 25% lower than the old PPA price for Pha Lai 1 which was good until last year.

Depreciation expense plunged 89% y/y while overhaul cost soared as Pha Lai 1 is fully depreciated – PPC depreciation cost fell to just VND39 billion in 1-H FY2016, or 89% lower y/y. However PPC paid VND203 billion (we only have full year numbers for FY2015 and taking half of that we estimate this is up 139% y/y) in overhaul cost in 1-H FY2016. Pha Lai 1 has been fully depreciated since Q3 FY2015.

As a result GPM shrank – Given the above, 1-H gross profits fell sharply by 58% y/y to VND134 billion while gross profit margins shrunk from 7.54% to 4.17%.

Net financial income turned negative given the FX loss – PPC recorded a net financial loss of VND480 billion in 1-H FY2016 vs a VND17 billion net financial gain in 1-H FY2015. We note an amount of VND70 billion in financial reversal from Quang Ninh Thermal Power JSC however the net FX loss rocketed from VND78 billion in 1-H FY2015 to VND677 billion in 1-H FY2016. Given that during 1-H FY2016, the JPY appreciated 16% against the VND. On the date 06/30/2016, the end borrowings denominated in JPY were reported at JPY22.281 billion or VND4,858 billion.

Moreover, PPC booked a lower VND45 billion in profits from associates from Hai Phong Thermal Power JSC (PPC owns a 29% stake) in 1-H FY2016 vs VND95 billion in 1-H FY2015. Same factors at play here; a lower CGM price and an expanding FX loss.

Finally, EBT came in at a loss of VND(348) billion and NPAT came in at a loss VND(349) billion. In term of core EBT (excluding for FX loss and financial provision/ reversal), PPC posted VND259 billions of core EBT, down 45% y/y.

For FY2016 HSC revises down and now looks for 12% y/y drop in sales and a 43% y/y drop in NPAT.For the full year FY2016, we forecast sales of VND6,729 billion, an EBT of VND340 billion and NPAT of VND320 billion. This is 4% lower than PPC sales target and 46% lower than its EBT target. This is a 9% cut in our previous sale forecast and a 59% cut in our previous EBT forecast. Given the lower than expected power generation sale volume; lower ASP and surge in FX losses.

Our new forecast assumes the following:

Sales volume of 5,339 million kWh (-7% y/y), 4% lower than our previous assumption of 5,580 million kWh (-3% y/y). It will be distributed as follows; 1,815

ASP of VND1,249/kWh, 5% lower than our previous assumption of VND1,306/kWh as Pha Lai 1 was paid the CGM price in 1-H FY2016.

Depreciation expenses of VND88 billion (-81% y/y) and an overhaul cost of VND400 billion (+137% y/y) as Pha Lai 1 fully depreciated most of its machinery

and other equipment.

The SG&A to sales ratio will be unchanged at 1.4%.

JPY appreciates by a further 14.3% against the VND as USD/VND is unchanged at 22,540 and USD/JPY drops to 105. Consequently, the net forex loss will come to VND622 billion (+119% y/y) and net financial loss will decrease 34% y/y to VND258 billion.

At the end of FY2016, the net JPY borrowing will be posted at JPY21.352 billion. We note that in Q4 FY2015, PPC booked VND325 billions of financial provision for Quang Ninh Thermal Power JSC and we will maintain VND70 billions of financial reversal for Quang Ninh Thermal Power JSC booked 1-H FY2016 for full year FY2016.

Turn around strongly in 2-H FY2016 thanks to new PPA contract for Pha Lai 1 – The new PPA price for Pha Lai 1 was signed in May 2016. The new PPA fixed price is VND261/kWh, VND10/kWh lower than last year. We estimate that the PPA variable price is VND1,069 /kWh (-1% y/y). Hence, the new PPA price is around VND1,430/kWh (-1.4% y/y). Moreover, PPA volume allocated to Pha Lai 1 is 595 million kWh for the last 6 months. PPC is negotiating a retroactive payment of the difference between the new PPA price and CGM price of Pha Lai 1 for the 1-H FY2016. However we are less hopeful on this matter as the new contract runs from July.

We forecast FY2016 EPS of VND919/share generating a forward P/E of 16.1. If we exclude the FX loss, FY2016 core would come to VND2,212/share, and the FY2016 core P/E would be 6.74 times. EV/EBITDA comes to 9.8 times.

Investment thesis – Reiterate HOLD. The valuation is expensive under base case for FY2016 earnings as FX loss hurts them while the loss of volume and ASP for PL1 during the 1-H cannot be clawed back in our opinion. However, over the next 6 months, PPC is expect to turn around strongly thanks to new favorable PPA price and volumes. Short-term investors should consider these factors.

FINANCIAL RATIO

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